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Alibaba: cloud and chips carry the load
Ruben Dalfovo
Investment Strategist
Key takeaways
- Cloud revenue up 26%, with AI now a major external driver
- Group revenue missed estimates; operating profit slipped 3%
- NYSE-listed shares rose as investors priced tomorrow’s story over today’s profits
AI fuels cloud momentum
Alibaba’s June-quarter revenue rose 2% to CNY 247.7 billion (USD 34.6 billion) but fell short of expectations. However, excluding the divested businesses Sun Art and Intime, revenue would have grown 10% from last year. Operating income fell 3% to CNY 35 billion (USD 4.9 billion), as spending on cloud, AI, logistics and quick commerce weighed on results.
Cloud Intelligence was the standout. Sales jumped 26% to CNY 33.4 billion (USD 4.7 billion), with AI-related products delivering triple-digit growth for the eighth straight quarter. Management said AI now makes up a significant share of external cloud revenue. Alibaba is betting its infrastructure will remain the backbone of generative AI adoption in China, particularly as foreign suppliers face trade restrictions.
E-commerce wins users, loses cash
Alibaba’s domestic commerce engine still delivers scale. Taobao monthly active users rose 25%, fuelled by instant commerce rollouts and a strong mid-year shopping festival. The merger of Taobao, Tmall, Ele.me, and Fliggy created tighter links across the ecosystem, boosting engagement and driving record order volumes.
But growth is expensive. Heavy spending on delivery networks, consumer subsidies, and product expansion narrowed margins and turned free cash flow negative. CFO Toby Xu noted efficiency measures are underway yet stressed that Alibaba is deliberately investing ahead of the curve to lock in consumer mindshare.
Ant Group offered no cushion. The fintech affiliate posted a 60% profit slump, reflecting higher R&D and global expansion costs. That decline directly reduced Alibaba’s equity income, keeping overall profitability under pressure.
Chips: Alibaba’s homegrown hedge
Beyond near-term numbers, Alibaba is advancing its AI hardware ambitions. The company is testing a new chip designed for a wider range of inference tasks—core to running large AI models. Unlike its earlier processors fabricated at TSMC, the new design is produced by a mainland Chinese manufacturer. This shift highlights Beijing’s drive to develop self-sufficiency in semiconductors after US curbs cut off access to Nvidia’s most advanced chips.
Nvidia’s H20, the only high-end AI processor it is allowed to sell in China, faced restrictions earlier this year. Although exports have since resumed, Chinese firms like Alibaba are racing to build alternatives. Developing a versatile in-house chip would not only reduce supply-chain risk but also secure the infrastructure needed to expand Alibaba Cloud’s AI services.
For investors, the chip project signals how far Alibaba is willing to go to protect and monetise its AI roadmap—even if profits are delayed by heavy upfront investment.
Investor reaction: story over numbers
Despite softer revenue and earnings, Alibaba’s ADRs gained about 7% in pre-market trading on 29 August 2025. Investors focused on the faster-growing segments—cloud, AI products, and user expansion—rather than near-term profit erosion. This reflects a broader dynamic: markets often reward a credible growth story, even when current numbers disappoint.
The optimism rests on two planks. First, Alibaba has proved its AI story is not just narrative: cloud demand tied to AI workloads is producing real revenue growth. Second, the chip effort shows it is not relying solely on foreign technology at a time when geopolitics can redraw supply chains overnight. Together, these give investors confidence that Alibaba’s roadmap is future-proof, even if the present looks messy.
What to watch next
- Cloud margins: will scaling AI workloads translate into profit or just higher costs?
- E-commerce efficiency: can instant commerce monetise at scale without eroding free cash flow?
- Ant Group recovery: a clearer path to profit is needed to lift sentiment.
- Chip development: progress on in-house AI semiconductors could be a strategic hedge against US curbs.
Building tomorrow costs today
Alibaba is doubling down on its twin pillars of consumption and cloud. Consumption spans everything from Taobao shopping to Ele.me food delivery—a play to capture more of China’s daily spending. Cloud is the backbone of its AI push, now reinforced by in-house chip development. Together they tell a story of scale and self-reliance, but also of thinner margins and heavy investment.
The bet is clear. If Alibaba can harness China’s consumer base while also powering its digital backbone, it creates a flywheel of demand and data. The risk is equally clear: profits today are thinner, and investments in chips, logistics, and commerce need time to pay off.
This material is marketing content and should not be regarded as investment advice. Trading financial instruments carries risks and historic performance is not a guarantee of future results.
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The instrument(s) referenced in this content may be issued by a partner, from whom Saxo receives promotional fees, payment or retrocessions. While Saxo may receive compensation from these partnerships, all content is created with the aim of providing clients with valuable information and options..